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Wal-Mart will test a cheaper version of Amazon Prime

May 14, 2015 01:18 PM

Wal-Mart Stores Inc. plans to test an Amazon Prime-like loyalty program that will offer online customers unlimited free shipping for $50 a year. Wal-Mart will roll out the test by invitation only to customers in a limited number of markets beginning late this summer, according a spokesman for Wal-Mart. He would not disclose the number of customers that will be involved in the test, nor in which markets the test will run.

The program will offer customers free delivery in three days or less on more than one million top-selling items across a number of categories, including toys, home decor, electronics, sporting goods and apparel. That compares with Amazon Prime, which gives members free two-day shipping on 20 million items for $99 a year. Other services Amazon Prime offers, such as free streaming video and e-books, will not be included in Wal-Mart’s test, the Wal-Mart spokesman says

Wal-Mart, No. 3 in the Internet Retailer 2015 Top 500 Guide, sells about eight million products on its e-commerce sites and says the move is one of the retailer’s many tests aimed at servicing customers in new ways. They includes its experiments with delivering groceries to online consumers, and same-day delivery of web orders. “We’ve heard from customers that they want shipping that’s predictable and affordable,” the spokesman says. “So this will test that.”

Wal-Mart is testing grocery delivery in five markets—Phoenix; Huntsville, Ala.; San Jose, Calif.; Denver; and Bentonville, Ark., where Wal-Mart is based. In Denver, consumers have the option to have orders delivered to their homes for a fee or pick them up at the store for free. Wal-Mart says the prices for goods ordered online are identical to what consumers would pay if they shopped at that local store. Wal-Mart launched online grocery sales in 2011 in San Jose.

One analyst says Wal-Mart’s program may be less appealing than Amazon’s because it lacks many of the perks that Amazon Prime members appreciate, such as free streaming video, e-books and music. “Prime is about so much more than shipping,” says Matt Nemer, a retail analyst at Wells Fargo & Co. “While we're encouraged Wal-Mart is jumping into the mix, Wal-Mart will have heavy lifting ahead to catch up with Prime, which we believe will continue to push the envelope on shipping speed and add new services,” Nemer said.

Another analyst wonders why Wal-Mart has waited until now to launch this type of loyalty program, but says it could be a practical alternative to Amazon’s more pricy Prime membership. “They're definitely late to the game but they're catching up in online sales in general so it's not entirely impossible that this is a viable competitor to Amazon,” says Sucharita Mulpuru, Forrester Research Inc. vice president and principal analyst. “They'll have to offer a lot more than free fast shipping though because Barnes & Noble has been doing something similar for its members and it hasn't moved the needle much in their business.”

The program is likely to be a money-loser for Wal-Mart, says Steve Banker, service director, supply chain management at Boston-based ARC Advisory Group. “Prime has been a great tool for acquiring customers and getting existing customers to spend more. But it is a money loser. I’ve seen analyst estimates that Amazon loses at least $1 billion annually on Prime-related shipping expenses,” he says.

“It might be somewhat less costly for Wal-Mart if they can leverage their stores to ship some substantial portion of e-commerce orders, because the stores are closer to customers than Amazon distribution centers. However, this drives up picking and packing costs because you can’t do fulfillment as cheaply in a store,” Banker says.